Social and welfare issues

Asia’s Challenges

The forces driving Asia’s rapid growth–new technology, globalisation, and market-oriented reform–are also fuelling rising inequality. Some income divergence is inevitable in times of fast economic development, but that shouldn’t make for complacency, especially in the face of rising inequality in people’s opportunities to develop their human capital and income-earning capacity.

Against the backdrop of an elusive global recovery, Asia continues to lead global growth. But even Asia’s performance is down on where it was before the crisis, and governments must remain vigilant to the risk of further global shocks in the near term. They face other challenges, too–important long-term problems that must be addressed now if Asia is to build on what has already been achieved.

Asia’s rapid growth in recent decades has lifted hundreds of millions out of extreme poverty, but the region remains home to two-thirds of the world’s poor, with more than 800 million Asians still living on less than $1.25 a day and 1.7 billion surviving on less than $2 a day. Poverty reduction remains a daunting task.

One of the most visible side-effects of Asia’s rapid growth has been environmental damage. The reliance on fossil fuels has degraded air quality and eco-systems, reduced the supply of clean water, and created significant health hazards. Asia has become the world’s largest source of greenhouse gas emissions, which are linked to global warming and climate change. Its cities are amongst the most polluted and the most vulnerable to extreme weather events. Recent climate-related disasters in China, the Philippines and Thailand are a reminder that Asian policymakers must act now to protect their citizens and mitigate and reverse the signs of climate change to secure sustainable growth for the future.

A new, perhaps more complex, challenge for developing Asia is how to confront rapidly rising inequality.

The gap between Asia’s rich and poor has widened alarmingly in the past two decades. In many countries, the richest 1% of households account for close to 10% of total consumption, and the top 5% account for more than 20%. The Gini coefficient, a measure of inequality, has increased in much of the region: taking developing Asia as a single unit, the Gini coefficient has increased from 39 to 46.

And the gap is not only in income. Inequality of opportunity is prevalent and is a crucial factor in widening income inequality. For example, school-age children from households in the poorest income quintile are up to five times more likely to be out of primary and secondary school than their peers in the richest quintile; infant mortality rates among the poorest households were 10 times higher than those among the affluent households; in South Asia, women’s labour force participation is only 40% that of men’s; and in Central and West Asia, girls’ primary and secondary school enrolment levels are 20% lower than those of boys.

For developing Asia as a whole, 1.7 billion people (45% of the population) lack access to sanitation and 680 million are without access to electricity.

A recent Asian Development Bank (ADB) study cites three forces behind this rising inequality: new technology, globalisation, and market-oriented reform–ironically, they are also the primary drivers of Asia’s rapid growth. These forces have created enormous economic opportunities, but the opportunities have not been equally shared by all.

Three groups, in particular, have benefited most. The first are the owners of capital, who, as a result of the bias of technological progress, have seen their share of national income rise while that of labour has fallen. Asia’s large pool of available labour has also depressed wage rates relative to returns on capital.

The second group is made up of those living in cities and near coasts and who have gained greatly from better infrastructure and market access. For example, rural-urban and inter-provincial gaps combined account for 54% of total income inequality in China and about 32% in India. And finally, better educated graduates make up a third group which has managed to increase its income, thereby widening the gap relative to those with just a basic education.

Moreover, the impact of these forces has been compounded by various forms of unequal access to opportunity–to earn income from labour and to build human capital–caused by institutional weaknesses, market distortions, and social exclusion.

Rising inequality can dampen the poverty-reduction impact of economic growth, and weaken the basis of growth. Had inequality remained stable in Asian economies, instead of increasing, growth would have lifted another 240 million people out of poverty between 1990 and 2010. This is equivalent to 6.5% of developing Asia’s population in 2010. High and rising inequality can undermine long-term growth by wasting human capital, increasing social tension, weakening governance and increasing pressure for inefficient populist policies.

Fortunately, Asia’s policymakers are responding to rising inequality. More and more countries are placing inclusive growth–growth based on equality of opportunity–at the heart of their development policy. In an informal survey of Asian policymakers carried out by the ADB, more than 65% of respondents agreed that income inequality in their country was high or very high. Almost all reported that incomes in their respective countries were becoming more unequal. A majority felt that success in reducing poverty was not enough to justify widening inequality.

Because the forces behind rising inequality are also the engines of productivity and income growth, policy options to reverse these trends become more complex. A distinction needs to be made between the income differences that arise as economies and individuals take advantage of opportunities created by new technology, trade, and efficiency-enhancing reforms, versus those that are generated by unequal access to market opportunities and public services. The latter require a rigorous policy response, especially since they are magnified by the driving forces of growth, lead to inefficiency and inequity, and undermine sustainability of growth.

Reducing inequality and making growth more inclusive in Asia, therefore, requires the following mutually-re-enforcing policy actions.

First, fiscal policy must play an important role. Spending on social sectors–health, education and social protection–should be increased to build human capacities, especially of the disadvantaged, and reduce inequality in human capital. This can be achieved without upsetting fiscal stability if governments raise more revenue by improving tax systems and administration and switching inefficient general subsidies such as those on fuels to more targeted transfers. At the same time, social sector spending should be used more effectively and efficiently, through better allocation and by plugging leakages.

Second, the gap between rural and urban areas and across provinces must be bridged. Regions lagging behind need more and better infrastructure–not just in the form of physical connectivity, but also through policies and institutions that ease the flow of goods and services. Growth centres could be developed in lagging regions. Regional inequality in China, for example, declined after it introduced its greater western development strategy. Barriers to migration from poor and rural to more prosperous and urban areas should also be removed.

Third, productive and decent jobs are a must for inclusive growth. This requires a business environment conducive to private investment and a well balanced composition of growth between industry, services, and agriculture. Also, eliminating distortions that favour capital over labour, supporting small and medium-sized enterprises, building labour market institutions, and setting up public employment schemes as a temporary bridge to address pockets of unemployment and underemployment can help raise labour incomes.

Finally, measures designed to create more opportunities and equalise access to them must be supported by good governance in the form of promoting wider participation, strengthening rule of law, reducing corruption, and eliminating social exclusion.

Asia has enjoyed a remarkable period of growth and poverty reduction, but the new realities of technological progress, more globally integrated markets, and greater market orientation are magnifying inequalities in physical and human capital. Asian policymakers must redouble their efforts to bring opportunities in employment, education, health and other key social services to all–thereby making growth more inclusive.